Before you offer net-30: how to size up a customer's credit

Picture two transactions. A walk-in wants to put $50 on a card, and your terminal checks the card, the funds, and the fraud flags in about two seconds before it approves. A new client wants $20,000 of work on net-30, and you say yes on the strength of a purchase order and a good first phone call. One of those decisions is screened to the penny. The other — four hundred times larger and unsecured — often isn't screened at all. That gap is where a lot of bad debt is quietly born.

Extending payment terms is lending. When you deliver goods or services and agree to collect in 30 days, you have made your customer an unsecured loan for the full invoice amount, without interest and usually without asking a single question a lender would ask. The good news is that the questions aren't hard, and you can answer most of them before the work ever starts.

A credit check tells you what the sales call won't

A friendly buyer and a busy-looking office tell you nothing about whether a company pays its bills. A business credit report does. As trade-credit insurer Allianz Trade puts it plainly, "before you extend credit terms to any customer, it is strongly advised that you check their creditworthiness" — and checking a customer's credit reports, history, and score is what tells you how likely they are to pay and how large a credit limit is sensible.

The National Association of Credit Management, the main professional body for business credit, frames the same review around the classic five C's of credit — character, capacity, capital, collateral, and conditions — with particular weight on character, the customer's track record and willingness to pay. It also flags the concrete warning signs worth searching for before you commit: prior bankruptcy filings or active litigation. None of that shows up on a sales call. All of it shows up in a ten-minute check.

The five things worth doing before the first invoice

You don't need a credit department to do this well. A workable process for a small business is short. First, use a written credit application for any customer who wants terms, so you're collecting the same information every time and you have their signature on the terms they agreed to. Second, pull a business credit report — the paid reports from the major commercial bureaus, or a trade report through a body like NACM, exist precisely for this. Third, call two trade references and the customer's bank; a company that pays its other suppliers on time usually pays you on time too.

Fourth — and this is the step most owners skip — set a credit limit and write it down. Vetting isn't a pass/fail gate; it's how you decide how much unsecured exposure a given customer has earned. A new account might start at a modest limit on shorter terms and grow as it builds a payment history with you. Fifth, put the whole thing in a one-page credit policy so the answer doesn't change based on who's asking or how badly you want the deal.

Match the terms to the risk

The point of the check isn't only to reject bad accounts — most customers will pass — it's to price the risk into the terms you offer. A strong, established buyer can reasonably get net-30 and a healthy limit. A thin file, a young company, or a customer carrying red flags might get a smaller limit, shorter terms, a deposit up front, or an early-payment discount to pull the cash in faster. Allianz Trade makes the same connection between the credit review and the terms and limits you set. You are still winning the business; you're just not funding an open-ended loan to a stranger to do it.

Vetting lowers the risk. It doesn't erase it.

Here's the honest limit of all of this: even a well-run credit check can't guarantee payment. Good customers hit bad quarters. A buyer who paid every invoice for two years can slow down when their own customers slow down. Vetting shrinks the odds of a blow-up and sizes your exposure sensibly — it doesn't remove the ordinary reality that some invoices, from perfectly good customers, will still go past due.

That's the other half of getting paid: front-end credit discipline decides who you lend to and how much, and a disciplined back-end decides what happens the moment a good customer slips. The invoices worth the most are the ones you engage early, in the pre-collections window, while they're still fresh and the relationship is intact. Screen well going in, move fast when a payment slips, and the gap between what you're owed and what you collect stays small.